When the Federal Reserve Board invites comments on proposed changes
to one of its regulations, a few hundred responses typically trickle in.

But before its recent deadline for feedback on amendments that
would revise the disclosure rules for closed-end mortgages, or mortgages
that can't be paid off until they mature, the agency was deluged
with nearly 4,000 comments.

Many came from loan originators, in New York and elsewhere, who
alleged that the Fed's proposal to restrict a compensation practice
known as yield-spread premiums --YSPs for short -- will put mortgage
brokers out of business and hamper lending.

A yield-spread premium is a commission paid to a loan originator
for selling a consumer a loan with a higher interest rate than the
consumer qualified for. (The Fed officially defines a YSP as "the
difference between the lowest interest rate a lender would have accepted
on a particular transaction and the interest rate a loan originator
actually obtained for the lender.")

Mortgage brokers portray YSPs as helpful to consumers who do not
have the cash in hand to pay originators' fees that banks often
charge. Consumer advocacy groups, however, deride the upcharges as
kickbacks that encouraged some brokers to steer borrowers into more
expensive loans.

While exact figures are not available, mortgage industry sources
agreed YSPs represent a substantial portion of many New York area
brokers' compensation.

Richard Biondi, the past president of the New York Association of
Mortgage Brokers, and a Long Island-based mortgage broker, attributed 98
percent of his compensation to these premiums. "If we eliminate the
YSP, the first thing you're going to do is eliminate all the
brokers," said Biondi.

So before the Fed hands down a decision, the industry is ramping up
lobbying efforts to fight a ban on most YSPs (at least those where
there's the potential for a broker to earn more from the lender for
steering a client into a more expensive loan).

Insiders expect the Fed to prevail in this unprecedented effort to
curtail YSPs. They said the ailing mortgage industry will likely see a
radical shift away from YSPs to other forms of percentage-based
compensation.

Some mortgage brokers forecast lower profits and more defections
from the already shrinking industry. "Regulators have been dancing
around YSPs for the last 10 years ... but until now, no regulator has
actually proposed prohibiting it," said Guy Cecala, CEO and
publisher of Inside Mortgage Finance Publications, a Maryland-based
publisher of newsletters and research.

"Basically they're going to force the industry to come up
with an alternative compensation system."

Passions are running high because there's a great deal of
money at stake for everyone involved. According to a 2008 report by the
Center for Responsible Lending, borrowers paid an estimated $20 billion
in extra interest on loans made from 2004 to 2006 -- largely because of
YSPs.

Brokers defend YSPs as tools for consumers to finance their loans
through the interest rate rather than shelling out cash up-front in the
form of points. But YSPs can "create financial incentives to steer
consumers to riskier loans for which originators will receive greater
compensation," the Fed notes in the Federal Register.

Now, with the possible Fed rule change, loan originators -- both
mortgage brokers and individual loan officers at banks -- may not be
able to receive payments based on a loan's terms and conditions.
Originators can still receive payments from lenders for delivering
loans, and fees will be disclosed to borrowers.

Eric Appelbaum, president of the Midtown-based Apple Mortgage
Corp., expects that in the new compensation scenario, banks will decide
what a broker makes regardless of the interest rate a consumer pays. He
noted that savings banks have been using such a system for years.
"I'm guessing Wells Fargo [or other lenders] will decide how
much Apple Mortgage is going to make," said Appelbaum.
"'If you're a Tier 1 broker, we pay you 1.5 percent, Tier
2, we pay you half a percent' -- that could happen."

Others agree that lenders paying brokers a flat percentage is one
likely outcome. At issue here, however, is the fact that origination
costs are typically capped at 1 percent. If a bank pays a broker 1
percent and wants to charge another 1 percent to keep that revenue
stream coming, common sense says consumers are likely to balk.

"Most likely we'll see a combination of, for example,
giving brokers half a percent and charging half a percent [to the
lender], and then basically ending up with the 1 percent origination
fee," said Cecala.

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